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The two sides face off at Old Trafford in the first Manchester derby of the season this weekend, with City sitting eight points clear at the top of the Premier League.
Pep Guardiola’s side are seeking a record-breaking 14th consecutive league win but have struggled to dominate teams in recent weeks and have relied on late winners in each of their last three games.
United have won four in a row and Scholes is confident that Jose Mourinho’s side can continue that run and close the gap at the top.
When asked if he thought they were title contenders Scholes said: “You’d like to think so wouldn’t you.
“They’ve shown over the last couple of weeks they can compete with City.
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“I think they can beat City on Sunday but we’ll just have to wait and see.”
Man Utd legend Paul Scholes
“City we know at this minute are on a different level. The last three games, okay they’ve struggled but they’ve got over the line which is always difficult to do.
“But I think United are in good form and these last two or three games they’re scoring goals and they look dangerous.
“I think they can beat City on Sunday but we’ll just have to wait and see.”
Manchester United came from behind against CSKA Moscow this evening to finish top of Group A in the Champions League.
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Manchester City face their final European group fixture tomorrow having already qualified, as they travel to Shakhtar Donetsk.
Sunday’s clash kicks off at 4.30pm.